Risk Note - Contracts - Insurance Clauses

OVERVIEW OF ISSUE

One of the most important tasks in the management of a contract is to identify the goals, the

expectations and the reasons for entering into a contract. Having them clearly determined

makes it easier to assess risks and to then put mechanisms in place for mitigation.

Insurance and indemniﬁcation clauses are fundamental to a well-drafted contract. The

indemniﬁcation clause identiﬁes the party that must pay damages. The insurance clause

supports the promise made in the indemniﬁcation by providing the indemniﬁer the ﬁnancial

resources for losses that may result from a claim. Insurance requirements should be clear

and fair, appropriate to the risks, and the limits adequate for the claims that may arise. This

Risk Note addresses insurance provisions and provides an example of an insurance clause

while another risk note addresses the indemniﬁcation clause and provides an example.

Refer to related Risk Notes for further details:

• Contracts – Important Clauses

• Contracts – Indemnification with Hold Harmless and Defense Provisions

RISK

NOTE

Contracts – Insurance Clauses

THINGS TO CONSIDER

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KEY POINTS

• The indemnification of risks

in the contemplated activity

is an important part of

the process in managing

contract risks

• Careful review of insurance

limits and specifications is

required

Denitions

••

Per occurrence limit of liability - The per occurrence

limit is the maximum amount of money the policy will pay

for any one insured loss.

••

Aggregate limit of liability - The maximum amount the

insurance policy will pay in one year notwithstanding the

number of claims.

••

Certiﬁcate of insurance - Evidence of insurance

attesting to the currency of the coverage; usually

sufficient proof that adequate, appropriate and current

insurance is in place.

••

Certiﬁed copy of the policy - Is the most recent copy

of the policy, stamped and signed, which includes the

declaration page, wordings and any endorsements.

••

Occurrence coverage - A policy covering claims that

arise out of damage or injury that took place during

the policy period, regardless of when claims are made

(International Risk Management and Insurance).

••

Claims-made coverage - A claims-made policy applies

when a claim is made against an insured for the first

time during the policy period, regardless of when the

loss actually took place. If the policy has a retroactive

clause, the loss must occur on or after the retroactive

date.

••

Error and omission insurance – Insurance that protects

professionals against liability for committing an error or

omission while performing their duties.

••

Waiver of subrogation – An agreement between two

parties where one party agrees to waive their rights to

recover against the other party in the event of a loss.

Insurance Requirements

• Different specifications are required for different contracts.

Review the scope of work and consider the types of losses

or harm that could arise from the activities contemplated

in the contract. The insurance requirement portion of

the contract must clearly state the types of insurance

coverage, per occurrence limit of liability, aggregate limit

of liability, additional insured if any, evidence of insurance

and days of notice. Be as specific as possible. Consider

reviewing these provisions with your insurer.

Types of Insurance

• General Liability Coverage

• Designed for bodily injury and property damage

arising from the insured’s operation, general liability

coverage is often sufficient for contracts involving the

provision of services (e.g. maintenance of premises

or equipment), or liability for non-clinical operations

(e.g. fundraising events or a gift shop on hospital

premises) but is insufficient against liability arising out

of professional work (e.g. clinical work).

• Watch for gaps in coverage that can occur in general

liability policies. For example, personal injury can be

excluded by endorsement, which in turn exposes the

insured to threats such as invasion of privacy.

• Professional Liability Coverage

• Designed to protect professionals against liability

arising from errors and omissions in the performance

of their duties.

RISK

NOTE

Contracts – Insurance Clauses

HIROC.COM

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• Should there be even a very small exposure to

professional liability, ensure professional liability

coverage is required in the contract.

• Products Liability Coverage

• Exposure may arise out of a defect in a product sold,

distributed, manufactured or made available to the

public.

• This may be part of a general liability policy, but it can

be subject to an aggregate limit of liability.

• Though the figure is often the same, most policies will

indicate a per occurrence limit and an aggregate limit,

which has different uses. However, it is preferable not

to have an aggregate limit.

• Other types of Insurance

• Other types of insurance may apply under specific types

of circumstances including:

Clinical Trials Insurance: This type of insurance

provides a financial resource for those who

sponsor or conduct clinical trials;

Data Liability: This type of insurance covers

electronic data incidents that result in damage to,

loss of, loss of use of, corruption of and failure to

access electronic data;

Crime insurance: This provides coverage for the

insured’s loss of money, securities, and other

property caused by employee dishonesty, forgery,

loss inside and outside the premises, computer

fraud, counterfeit money, credit card fraud and

social engineering.

Limit of Liability

• Limits should reflect the risk and loss exposure, not the

value of the contract. The following should be considered

when establishing the limit of liability: risks involved in the

services provided by the contractor; contractor’s past loss

history; losses from similar services; experience of other

facilities with the same provider or with the same type of

operation.

Certiﬁcate of Insurance

• Most contracts require evidence of current insurance to

be submitted in the form of a certificate or memorandum.

Request certificates of insurance from all contractors,

professionals, tenants and parties to a contract and during

the entire term of the contract. Make note of insurance

expiry dates.

Named Insured vs. Additional Insured

• A named insured owns the policy, manages the coverages,

pays the premium, oversees claims and has access to

confidential information. The named insured also has rights

in the policy, e.g. receiving return premiums and payment

for damages that it would not want to share. Therefore, be

very careful about adding an entity as an additional named

insured.

• Additional insured is defined as person/entity not

automatically covered as an insured under an insurance

policy that is added as an insured at the request of the

insured person/entity. As a rule, additional insureds are

insured only in relation to a specific event, services,

agreements or contracts related to the insured’s

operations.( (International Risk Management and Insurance)

• An additional insured enjoys the protection of the policy

but only as the additional insured’s work relates to the

operation of the named insured. This additional layer

of protection provides organization coverage under the

vendor’s policy and allows the organization to greatly

improve their ability to obtain a legal defense for any

potentially covered claims. It is potentially broader

indemnity than a Hold Harmless agreement alone and

should be required in addition to the Hold Harmless

clause ( – Indemnification Clause with Hold Harmless and

Defense Provisions Risk Note for further details) If the

organization is an “Additional Insured”, the evidence of

coverage should clearly state this and for what purpose.

• When considering adding a party to the insurance, ensure

that liability is not assumed for operations that may cause

unexpected problems. Be sure that you know why a person

or an entity is being included as an additional insured. It

is possible that the requestor is unable to get his own

insurance and is relying on his additional insured status for

coverage.

• For example, a company providing fireworks for a special

event may not be added as an additional insured unless

it can provide the subscriber with proof of current,

appropriate and adequate insurance to which the

subscriber has additional insured status as well.

• An additional insured may not be added to Workers

Compensation policies or some professional Errors and

Omissions policies

Auto Insurance

• The vendor should be required to provide evidence of

automobile insurance if there is an automobile used in

any phase of the work performed. If employees use their

personal automobiles for work purposes and if leased or

hired vehicles are used, the insurance should include non-

owned and hired automobiles. Proof of personal liability

insurance should be required for the sole proprietor of the

vehicle.

Workers Compensation

• Request the vendor or contractor to provide evidence

of Workers Compensation unless the vendor is a sole

practitioner. If Workers Compensation coverage is

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•• Devaney P. (2012). How to maximize indemnity clauses-an important risk management tool.

•• Kent N. (2006). The CGL policy and the additional insured endorsement in Canada.

•• Keyes C., Donnelly T. (2011). Getting it right before the loss: indemnity, additional insured, and waiver of

subrogation issues.

•• International Risk Management and Insurance. (n.d.). Insurance glossary.

•• The Canadian Medical Protective Association. Medical-legal issues to consider with individual contracts.

REFERENCES

This is a resource for quality assurance and risk management purposes only, and is not intended to provide

or replace legal or medical advice or reflect standards of care and/or standards of practice of a regulatory

body. The information contained in this resource was deemed accurate at the time of publication, however,

practices may change without notice.

Date last reviewed December 2018

not required by the Province/Territory, obtain written

confirmation from the consultant before waiving coverage

requirement.

• In the absence of worker’s compensation coverage, a

vendor, contractor or another party to the contract may be

asked to purchase Employer’s Liability Insurance, which

could pay compensation and legal costs of an employer if

an employee or former employee sues for illness or injury

resulting from his or her employment.

• As some employers may not be required to purchase

worker’s compensation coverage, there could be an

exposure to injury and illness from the work being done on

the subscriber’s behalf.

Property Insurance

• Responsibility for property owned by one of the parties is

often dictated in the contract. There are two significant

situations where responsibility for property should be

spelled out clearly including: i) buildings in course of

construction and ii) installations and leases involving

tenant’s improvements.

• Specifications should include appropriate limits of coverage

and usually “all-risks” form loss payee-by being named

as loss payees have the right under the policy to be

reimbursed for a loss to your property.

• It is important to include a Waiver of Subrogation on

property risks in any Landlord tenant situation to eliminate

any dispute over cause of loss.

Other Insurance Considerations

• Ensure the contract’s insurance coverage requirements

specify that:

• Your organization is to be given at least thirty (30) days’

Notice of Cancellation prior to a material change in the

insurance coverage, cancellation or non-renewal;

• Insurance must be maintained for the duration of the

contract and failure to maintain insurance may be

considered a breach of contract. (Note: for construction

projects and claims-made polices, ensure the duration

of the coverage extends a number of years past the end

of the project).

RISK

NOTE

Contracts – Insurance Clauses

Sample Insurance Requirements,

Certiﬁcate of Insurance and

Additional Insured Clause

SAMPLE ONLY:

Please note that

this is only a sample wording and

your own insurance clause will

vary according to the requirements

involved and after ﬁnal discussion

with the other party. Please refer to

your legal counsel before proceeding.

SAMPLE

During the term of this agreement XXXX shall maintain in full force and eect

general liability insurance (and professional liability insurance, if required) for

a minimum of XXXX any one occurrence. Such insurance shall name XXXX

as additional insured but only with respect to this agreement.

• e general liability insurance shall include at least the following:

• Products and completed operations;

• Personal injury;

• Cross liability;

• Contractual liability;

• irty (30) days’ prior written notice of material change to, cancellation,

or non-renewal of the policy.

XXX shall provide XXX (hospital) with evidence of insurance upon request.